Subprime risk: Most vulnerable markets

2.2 million homeowners are endangered by the subprime crisis. Which markets may be hardest hit?

By Les Christie, CNNMoney.com staff writer

March 22 2007: 12:20 PM EDT

NEW YORK (CNNMoney.com) -- If the doomsayers are correct, as many as 2.2 million subprime borrowers are at risk of defaulting on their loans and losing their homes.

As foreclosures rise and credit tightens, housing markets across the nation may suffer - though some are clearly more vulnerable than others.

Top 10 subprime markets

These metro areas have the highest share of their loans as subprimes.

Metro area

State

Subprimes as %of all loans

McAllen

TX

26.8%

Memphis

TN

24.0%

Sharon

PA

23.1%

Miami

FL

23.0%

Richmond

VA

22.3%

Brownsville

TX

21.6%

Merced

CA

21.6%

Sumter

SC

20.7%

Bakersfield

CA

20.2%

Jackson

TN

20.2%

Source:First American LoanPerformance

Top 10 subprime delinquency markets

These are places with the highest percentage of subprime loans 60 days or more late.

Metro area

State

% of delinquentsubprime loans

Cleveland

OH

24.9%

Detroit

MI

24.6%

Jackson

MS

22.7%

Jackson

MI

22.0%

Youngstown

OH

21.8%

Flint

MI

20.7%

South Bend

IN

20.3%

New Orleans

LA

20.1%

Kankakee

IL

20.1%

Akron

OH

19.7%

Source:First American LoanPerformance

According to First American LoanPerformance, a leading research and data provider to the mortgage industry, the metro area with the highest percentage of subprime mortgage loans in the United States is McAllen, Texas, where 26.8 percent of all mortgages are subprime.

Other cities on the risky side of 20 percent include Memphis (26 percent), Sharon, Penn. (24 percent) and Miami (23 percent).

Throughout the nation, the subprime loans recently made are performing very poorly. "What we're seeing is subprime 2006 loan originations are going delinquent much more quickly," said Bob Visini, vice president of marketing for First American LoanPerformance. "2006 is way ahead of previous years."

Even some of the metro areas with the lowest rates of subprime loans - including Iowa City (2.9 percent), Burlington, Vt. (4.0 percent) and Dubuque, Iowa (4.2 percent) - may be more vulnerable than they first appear.

In a lot of these places, a disproportionate number of owners refinanced with subprime loans during 2004 and 2005, according to Allen Fishbein, director of credit and housing policy at the Consumer Federation of America.

In the Davenport, Iowa metro area, for example, 47.6 percent of all refinancings done in 2005 were subprimes. In Peoria, Ill., the figure was 45.4 percent and in Omaha, 42.9 percent.

Because so many owners refinanced at roughly the same time, much of the subprime exposure was funneled into a very narrow time frame.

Most subprimes are so-called 2/28 (or 3/27) loans, meaning that the first couple of years of payments are at the low "teaser" rate. After that, the loans reset every six months or year to the higher, fully indexed rate, which can cost borrowers hundreds of extra dollars each month. The 3/27s done in 2004 and 2/28s from 2005 will all reset this year.

Here's what the resets can do to monthly mortgage payments: At the original rates of, say, 6 percent, the payment on a $200,000 home was only $1,200 a month. Upon reset, however, at perhaps 10 percent, that monthly payment jumps to $1,755, a $555 increase.

It's not just borrowers who suffer: "The [resets] could have a major effect on whole neighborhoods," Fishbein said.

He explains that recent studies indicate that even one foreclosure may reduce values of neighboring properties by about 5 percent. That can cut into home equity even for those who keep current with their bills and make it harder for them to borrow because it lowers their home equity.

Of course, subprime borrowing is only one factor that can lead to defaults and simply because an area has high rates of subprime borrowing, it doesn't mean the foreclosure rate there will be high.

Other factors, including home appreciation, local economic strength and job growth and population growth can be just as, or more, critical. Fundamentally strong local areas will be unlikely to experience wholesale foreclosures. Where the economy is weak - think Rust Belt - large foreclosure volumes are much more of a threat.

Cities like McAllen, which is experiencing robust economic, job and population growth, thanks to its position on the Mexican border and the maquiladora factories south of the Rio Grande, will probably experience few problems, but old industrial towns, like Sharon, could get hammered.

An important indicator of vulnerable housing markets is how well loans are performing. If subprime delinquency rates have soared recently, it usually is because of fundamental problems in an area's economy.

Judging by the percentage of subprime loans 60 days late or more, Midwest markets could be facing a big jump in foreclosures, according to LoanPerformance. In the Cleveland area, where the subprime exposure at 15.5 percent is higher than the national average of 14.7 percent, nearly a quarter of all these loans were 60 days or more late, the worst subprime delinquency rate in the nation.

Eight of the markets with the highest subprime delinquency rates were in the Midwest, where the auto industry has been battered by layoffs and plant closings. Two were in the South, including New Orleans.

Those markets are likely to produce the most subprime-related defaults and foreclosures this year.